A testamentary trust is a type of trust that is contained within a will. Trusts are legal arrangements for distributing a person's property. The terms of a testamentary trust go into effect when the trust creator, known as the testator or grantor, dies. The testator can change the testamentary trust at any time before her demise. Testamentary trusts are frequently used to control how the testator's estate -- her property and life insurance -- is distributed after she dies.
Elements of a Testamentary Trust
In a testamentary trust, the testator sets forth the rules for how one or more beneficiaries will receive all or part of her estate. The testator can attach conditions that affect the amounts, timing and circumstances surrounding distributions from the trust. The testator names a trustee to oversee the trust and carry out the testator's instructions, although a trustee has some leeway in responding to events after the testator's death. Testamentary trusts are subject to state probate court supervision, which is public, time consuming and costly.
Typical Uses of a Testamentary Trust
Typically, parents and grandparents use a testamentary trust to specify and control an inheritance to a minor or a person with special needs. For example, a parent may set up the trust so her ex-spouse receives half the proceeds from the estate in a lump sum and her young son receives his half over several years until he reaches a certain age or experiences a particular life event.
Alternative Types of Trusts
Minors can't receive substantial inheritances directly. Rather, a custodian or trustee must manage and distribute the inheritance according to the relevant rules. As an alternative to a testamentary trust, a grantor can set up a trust account under the Uniform Transfers to Minors Act, or UTMA. With this approach, the minor receives the bulk of the inheritance once reaching majority age, which is 18 or 21, depending on the state. Another alternative is a living trust, set up, activated and modifiable by the grantor during her lifetime.
Pros and Cons of a Testamentary Trust
Adding one or more testamentary trusts to a will is an inexpensive way of setting up trusts. The will acts as the central organizing vessel containing the trusts, which makes it convenient for the testator to change one or more testamentary trusts all within a single document. On the downside, unlike UTMA accounts and living trusts, testamentary trusts do not avoid probate. Since testamentary trusts don't come into existence until the testator dies, problems may develop if the named trustee can't or won't accept the duties. In this case, the probate court names a trustee who may administer the trust in a way that differs from what the testator expected.
Eric Bank is a senior business, finance and real estate writer, freelancing since 2002. He has written thousands of articles about business, finance, insurance, real estate, investing, annuities, taxes, credit repair, accounting and student loans. Eric writes articles, blogs and SEO-friendly website content for dozens of clients worldwide, including get.com, badcredit.org and valuepenguin.com. Eric holds two Master's Degrees -- in Business Administration and in Finance. His website is ericbank.com.